Question

Connect Homework Chapter 10 Saved Help Save & Exit Submit 3 Montclair Company is considering a project that will require a $620,000 loan. It presently has total liabilities of $160,000 and total assets of $680,000. Exercise 10-15 Applying debt-to-equity ratio LO A3 1. Compute Montclair's (a) current debt-to-equity ratio and (b) the debt-to-equity ratio assuming it borrows $620,000 to fund the project 2. If Montclair borrows the funds, does its financing structure become more or less risky? points Skipped Choose Numerator: Choose Denominator: eBook Debt-to-Equity Ratio Print 0 1. (a) References 1. (b) 0 If Montclair borrows the funds, does its financing structure become more 2. or less risky?
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Answer 1

Debt To Equity Ratio = Total Liabilities / Total Stockholders' Equity In question, Total Liabilities and total assets are given. We have to calculate total stockholders' Equity which is calculated as follows Total Stockholders' Equity = Total Assets - Total Liabilities for part 1. (a), Stockholders' Equity = $680,000-$160,000 = $520,000 for part 1. (b), Stockholders' Equity = ($680,000+$620,000)-($160,000+$620,000) = $520,000 Choose Choose Numerator | Denominator 1. (a) 160000/ 520000 0.31 1. (b) 780000 / 1300000 0.60 2. Increasing Debt to Equity ratio means company is financed by creditors rather than internal positive flow of cash hence it is MORE RISKY